Fed Up Yet?

AS SUMMER BECOMES fall, we commence the 100th anniversary of that most glorious of all the violations of the United States Constitution, the Federal Reserve. The legislation that eventually emerged as the Federal Reserve Act was introduced in the House in August 1913 and was enacted and signed in December. The Fed itself started doing business in 1914. It would seem that this is a dandy time to pause in our national rush to ruin so as to reflect on what the first century of the Fed has wrought.

The chairman of the Joint Economic Committee in Congress, Representative Kevin Brady, has been nursing a bill to create a Centennial Monetary Commission. The idea would be to look at all the questions related to how the Federal Reserve System has, or has not, worked. The Texas Republican is a cheerful, sensible, moderate fellow who has put out word that he wants the commission to be “brutally bipartisan.” Wouldn’t you know but that the Commission is given but a 14 percent chance of getting out of Brady’s own committee and a 2 percent chance of becoming law.

Instead, the press has been chasing the question of whether the next chairman of the Fed ought to be a woman. The New York Times assigned two reporters to write a story called “In Tug of War Over New Fed Leader, Some Gender Undertones.” They disclosed that the pro-woman camp was for the vice chairman of the Fed, Janet Yellen, while the pro-man camp was for a former treasury secretary, Lawrence Summers. This led the New York Sun to issue a bemused editorial called “The Female Dollar.”

So how is the nation that Reagan likened to a shining city on a hill going to get at the various issues surrounding the Fed? Particularly now that the Fed’s craftiest congressional critic, Ron Paul, has left Congress? The Texas libertarian-Republican had been nursing a measure to require an audit of the Fed, one that would look not only at its holdings but also at how it does business, including internationally. The bill actually passed the House on a bipartisan vote. But it died in that graveyard of reform, the Senate, where Ron Paul’s son, Rand Paul, is trying to carry on his dad’s effort.

A separate idea of Ron Paul’s is being promoted by a Republican congressman from Georgia, Paul Broun. It is a bill called the Free Competition in Currency Act, which is brilliant in its simplicity. It is but a page long and would repeal the legal tender laws and end any capital gains taxes on gold and silver coins. All currencies, government- or privately-issued, would be allowed to compete. It is based on an epiphany—I say that with no sarcasm—that came to Friedrich Hayek late in his career. The New York Sun was the first and, insofar as I’m aware, only newspaper to have endorsed the bill. The sad fact is that govtrack.us, a legislation-tracking Web site, gives it a zero percent chance of becoming law.

Congressman Brady, meantime, is advancing his own bill, and a very good one, called the Sound Dollar Act. It would end the dual mandate of the Fed by repealing a law known as Humphrey-Hawkins (in honor of Vice President Hubert Humphrey and Congressman Augustus Hawkins), which requires the Fed not only to stabilize prices but to keep down unemployment. Humphrey-Hawkins is so illogical that at its birth even the New York Times called it a “cruel hoax.” It is what makes your typical Fed chairman appear like a deer in the headlights every time he—or, maybe, she—goes up on Capitol Hill to testify.

Repeal of Humphrey-Hawkins is but one feature of the Sound Dollar Act. It would also give permanent seats on the board of governors of the Fed to the regional bank presidents, who tend to be a bit more in touch than the governors themselves. It would also bring back a role for gold in the formation of monetary policy, though it stops short of returning the country to a proper gold standard or to what some of us like to call “constitutional money,” meaning money defined in terms of gold, silver, and copper, as was envisaged by the Founders and codified in the original Coinage Act of 1792. Chances of passage are slim.

It may be that between now and the 101st anniversary of the Fed some sort of monetary Northwest Passage will be discovered that will lead to monetary reform. But that would be surprising. The fact is that Congress seems more or less content with the Fed it created, even if it has delegated too much of its power. Earlier in the summer, the central bank’s chairman, Ben Bernanke, made one of his semi-annual appearances before the House Financial Services Committee. Some members gave it their best, including Congressman Keith Rothfus of Pennsylvania, who asked: “Where does the Fed gets its money to buy its Treasury bills?”

“When we buy securities from a private citizen,” Mr. Bernanke burbled, “we create a deposit in their bank, and it shows up as reserves. So if you look up our balance sheet, our balance sheet balances. We have Treasury securities on the asset side. On the liability side we have either cash or reserves at banks, and on the margin that’s what has been building up as excess reserves at banks.”

“You create the reserves?”

“Yes,” the chairman replied.

“Is that printing money?”

“Not literally,” Mr. Bernanke answered.

The committee was unfazed. “The shabby condition of the economy has become a familiar background for Mr. Bernanke’s public appearances,” the New York Times explained. It noted that unemployment “remains stubbornly common” and growth is “tepid.” But it quoted Congresswoman Carolyn Maloney as telling Bernanke, who may have made his last appearance before the committee, “You have never been boring.” The chairman of the committee, Jeb Hensarling, a Republican of Texas, told Bernanke, “You acted boldly and decisively and creatively—very creatively, I might add.”

So where does one look for reform? The states are stirring. At least 13 of them are considering laws to grant legal tender status to gold or silver coins. The states themselves are forbidden by the Constitution either to coin money or to make anything other than gold or silver coins legal tender. But making gold or silver coins legal tender, as Utah has actually done, removes from them capital gains taxes, at least at the state level, and represents a pointed vote of no-confidence in the national currency. This is a brilliant program, nursed by the American Principles Project. But it has been slow going, rejected recently in no less a commonwealth than the Old Dominion.

So for those of us who believe that the monetary question is not only an economic problem and a constitutional matter but also a moral issue, this is a moment to remind ourselves of the long sweep of history. The Fed is not the only central bank America has had. The fate of the earlier two remind us that even the mightiest institutions are not permanent, though it did take, in Andrew Jackson, one of the crustiest critters ever to reside in the White House in order to end the charter of the Second Bank of the United States. At the time it was the largest private corporation in the world.

The centennial of the Fed is a time to remember that it required more than a century for America to resolve the question of whether silver or gold was the right specie on which to base our national unit of account. It took, in the campaign of 1896, a national election focused on the monetary issue itself to stifle the siren of silver and acknowledge the superiority of gold. This was codified in the Gold Standard Act of 1900, which was signed by President McKinley and ended the era of bimetallism.

It happens that before Congress would establish the central bank whose centennial we’ll be marking in the coming year, it laid down a condition. It was that nothing in the Federal Reserve Act was to be construed to repeal the parity of the dollar as established in the Gold Standard Act of 1900, or, as Congress put it, the act “to define and fix the standard of value” and “to maintain the parity of all forms of money issued or coined by the United States.” It’s hard to imagine that it will be another century before the logic of the creators of the Fed—not to mention of the Republic—will come back into focus.